Pension vs Lump Sum: Is a $250,000 Buyout Worth More Than $24,000/Year for Life?

Why this decision is worth modeling, not guessing

We ran the standard version of this decision through the calculator: a $250,000 lump-sum offer against a $24,000/year pension (with 2% COLA), for someone retiring at 65 who expects to live to 85. At a conservative 4% discount rate, the pension's present value comes out well ahead of the lump sum. The same inputs at a 10% discount rate flip the recommendation to the lump sum. The entire decision pivots on one assumption — what rate you'd actually earn investing the lump sum, and how confident you are in it — which is exactly why running your own numbers matters more than a rule of thumb here.

How the math works

Present value of the pension = the sum of each year's payment (growing with COLA, if any), discounted back to today at your assumed rate. The tool also solves for the breakeven discount rate — the rate at which the pension's present value exactly equals the lump sum — so you can see how sensitive the decision is to your return assumption, not just get a single yes/no.

Default assumptions in the example (4-5% discount rate, 2% COLA) sit inside the range of long-run bond and balanced-portfolio returns typical of conservative retirement-income planning — not an aggressive all-equity assumption, since this is money most retirees can't afford to lose.

What this tool doesn't model: joint-and-survivor annuity options (continuing a reduced payment to a spouse after your death — a real feature of the actual decision, not just a math input), the PBGC insurance backstop if your pension plan itself becomes underfunded, taxes (both paths are typically taxed as ordinary income, so this mostly nets out, but timing can differ), and Social Security interactions.

Math runs locally. Inputs never leave your browser.Source on github.

Where the pure-math answer misses something real

• The pension is a guarantee; the lump sum's return is not.Present value math treats both as equally certain, but they aren't — a pension pays regardless of what markets do, while lump-sum returns are only an assumption. If you can't stomach a bad decade right when you need the income, that's worth more than the math alone captures.
• Joint-and-survivor coverage isn't in this model.If you have a spouse who'd need continued income after your death, the real pension option is usually a reduced joint-and-survivor payment, not the single-life amount this tool uses — get both quotes from your plan and compare the survivor version separately.
• Your plan's funding status matters.A well-funded pension backed by the PBGC insurance program is a very different risk than an underfunded plan — check your plan's funded ratio before assuming the "guaranteed" side of this comparison is risk-free.
• You might not need to choose either extreme.Some plans allow a partial lump sum with a reduced pension — worth asking about if you want some of both the guarantee and the liquidity.

What to actually do with this number

1. Get the actual lump-sum quote and single-life pension amount in writing from your plan administrator.
2. Ask for the joint-and-survivor quote too if you have a spouse who'd need continued income.
3. Run the calculator at a conservative discount rate (4-5%) and again near the breakeven rate to see how sensitive the answer is.
4. Check your plan's funded status and whether it's covered by PBGC insurance before treating the pension as fully risk-free.
5. If the numbers are close, weight the guarantee itself — a close call usually favors keeping the pension unless you have other guaranteed income already.